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Banking regulation is marked by a seeming alphabet soup of regulatory bodies. The regulatory system we have now reflects the diversity of U.S. financial institutions and a number of legislative responses to banking crises that have occurred over time. Today, banks are regulated by multiple authorities, including the Federal Reserve.

Prudential Regulation

The responsibility for prudential regulation - monitoring and regulating banks for safety and soundness and adequate capital - is divided among three federal regulators:

The Fed supervises state-chartered banks that are members of the Federal Reserve System, bank and thrift holding companies and their nondepository institution subsidiaries, and certain large nonbank financial companies.

The Office of the Comptroller of the Currency (OCC), a division of the U.S. Department of the Treasury, charters and supervises national banks and thrifts as well as federally chartered branches and agencies of foreign banks.

The Federal Deposit Insurance Corp. (FDIC) supervises state-chartered banks that are not members of the Federal Reserve System.

Consumer Protection

Banks are also required to comply with numerous consumer protection laws and regulations. The Consumer Financial Protection Bureau (CFPB), an independent agency created under the Dodd-Frank Act, is responsible for writing most rules and regulations that apply to financial services companies, including banks.

The CFPB also examines banks and nonbank financial institutions with assets of more than $10 billion for compliance with consumer laws and regulations related to financial services. The three federal banking agencies enforce consumer protection rules for the banks they supervise that have assets of less than $10 billion.

The division of prudential and consumer compliance regulatory responsibilities is outlined in the table below.

U.S. Banking Regulatory Structure

Prudential and Consumer Compliance Regulation

State Member Bank

Nonmember Bank

National Bank

Charter Type

State

State

National

State Regulator

State of Charter

State of Charter

None

Primary Federal Regulator

Federal Reserve

FDIC

OCC

Deposit Insurance Regulator

FDIC

FDIC

FDIC

Consumer Compliance Regulator (Less than $10 Billion in Assets)

Federal Reserve

State

OCC

Consumer Compliance Regulator ($10 Billion or More in Assets)

CFPB

CFPB

CFPB

Federal Reserve Bank of St. Louis

State banking agencies also have regulatory responsibilities for the banks chartered in their states. To avoid duplication and regulatory burden, federal and state banking regulators coordinate exam schedules and often alternate exams.

Functional Regulation

A number of other federal and state regulators have a hand in bank supervision because of some of the products and services banks may provide. This approach is called functional regulation.

The Securities and Exchange Commission, the Commodities Futures Trading Commission, the Financial Industry Regulatory Authority and state insurance commissioners and securities regulators are some of the outside agencies involved in regulation of financial activities.

The Current Structure Versus Regulatory Consolidation

The sheer number of agencies involved in bank regulation - especially those tasked with safety and soundness regulation - frequently prompts calls for regulatory consolidation. Some observers express concern about duplication and its associated effects on regulatory burden. Others worry about a “race to the bottom," where excessive competition among regulators for banking clients may lead to lax standards and enforcement to curry favor.

Although both concerns are valid, there’s little evidence that either of those possibilities have occurred to any measurable extent. Rather than racing to the bottom, multiple regulators offer a practical choice to smaller banks and serve as a check on inefficiencies at fellow agencies.

This post is part of a series titled “Supervising Our Nation’s Financial Institutions." The series, written by Julie Stackhouse, executive vice president and officer-in-charge of supervision at the St. Louis Federal Reserve, is expected to appear at least once each month throughout 2017.

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